Yield-bearing stablecoins: What are they — and how are they reshaping DeFi?
Stablecoins are among the most popular cryptocurrency types in the market. Their rate stability and inherent link to traditional fiat currencies have drawn millions of crypto natives to use them for storing value and moving funds between blockchain and traditional finance (TradFi) sources. However, one of the most significant drawbacks of traditional stablecoins is their lack of yield: these assets are designed to be pegged to a major fiat currency, often the US dollar, but don't generate any interest on the principal amount.
This scenario starkly contrasts with fiat money held in deposit accounts at banks, as cash parked at a traditional banking institution earns you yield in the form of interest. Cash investments aren't known for stellar returns, but they can still protect your funds from value erosion due to inflation. Although stablecoins were envisioned as digital equivalents of fiat currencies, they don't earn interest when simply held in a crypto wallet.
Yield-bearing stablecoins are a relatively new trend in the crypto market, and are specifically designed to address this issue. As their name suggests, yield-bearing stablecoins allow you to earn yield, making them ideal for any investor who wants both rate stability and return potential.
The yield-bearing stablecoin niche has been growing quickly, as evidenced by a 583% increase in the category's market cap in 2024. Their surge in popularity has continued into 2025 as well. In February 2025, the US Securities and Exchange Commission (SEC) approved YLDS — a yield-bearing stablecoin offered by digital asset firm Figure Markets — as a security. This pivotal event is widely expected to further boost the already impressive growth of this segment. As of mid-April 2025, YLDS remains the only stablecoin of this kind to receive regulatory approval.
In this article, we’ll examine yield-bearing stablecoins and their benefits and risks, and consider the leading assets of this type currently dominating the rankings.
Key Takeaways:
Yield-bearing stablecoins are cryptocurrencies that maintain a stable peg to an established fiat currency, while offering yields generated from their underlying reserves.
There are three main sources from which these stablecoins generate earnings for their holders — native DeFi protocol yields, crypto derivatives based on liquid tokens, and tokenized traditional finance assets.
The key advantages of owning yield-bearing stablecoins include passive income, borderless access, lower opportunity costs, DeFi composability and a simplified user experience (UX).
What are yield-bearing stablecoins?
Yield-bearing stablecoins are cryptocurrencies that maintain a peg to an established fiat asset — similarly to traditional stablecoins — while also generating yield on the principal amount via various decentralized protocols or tokenized traditional finance instruments.
Traditional stablecoins have long been used to maintain the value of crypto funds tied to fiat national currencies. These cryptos, the first of which appeared over a decade ago, are tightly pegged to an asset or basket of assets. The most popular traditional stablecoins are typically pegged to the US dollar, and backed by cash and cash-equivalent reserves held by their issuers or authorized custodians.
Another type of stablecoin maintains its peg through algorithmic mechanisms instead of fiat reserves.
Regardless of how the peg is maintained, traditional stablecoins aren’t yield-generating assets. When you buy such a stablecoin, your funds retain their nominal value in the pegged fiat currency — but you earn no interest on the principal.
This lack of yield has long been seen as a core drawback of traditional stablecoins. This contrasts with fiat currencies held in bank accounts, which typically generate yield through accrued interest. While cash deposits don’t typically offer high returns as compared to more risky financial instruments, they can at least help offset inflation-driven erosion of the principal value.
Inflation and stablecoins
This erosion has become a bigger issue in recent years. In June 2021, US monthly inflation rose above 5% for the first time since mid-2008. The rest of 2021 and the following two years saw inflation levels not experienced in decades. As of April 2025, inflation is down, compared to the 2022 and 2023 peaks — but it’s still historically high.
Multiple years of elevated inflation rates have shone the spotlight on a key problem of traditional stablecoins: their lack of yield-generating capacity. While fiat deposits may soften the blow of inflation through interest, stablecoin holdings pegged to those same currencies are slowly losing their real value.
Major stablecoin issuers like Circle, the issuer of USDC, and Tether, the company behind USDT, use the fiat reserves backing their coins in yield-generating instruments. But instead of sharing those yields with holders, they keep the earnings. The result is that USDC, USDT and most other stablecoins offer no yield to users, while issuers pocket the income from the cash reserves backing the coins.
Yield-bearing stablecoins have emerged as a key answer to this issue — and it’s no surprise they’re now gaining traction as investors wake up to the limitations of holding traditional stablecoins in a high-inflation world.
How do yield-bearing stablecoins work?
Yield-bearing stablecoins generate returns for their holders primarily from:
decentralized finance (DeFi) native yield
crypto derivatives based on liquid tokens
interest earned on tokenized real-world assets (RWAs)
DeFi native yield
Some stablecoins generate yield via DeFi protocols' native solutions. Typically, you submit your funds to a protocol that uses them in various interest-generating activities, such as crypto borrowing and lending. As the protocol earns income through these activities, a portion of it is shared with the stablecoin holders via regular distributions. DeFi protocols may earn such income from charging protocol fees, position and vault liquidations, interest charged on borrowed funds and more.
Crypto derivatives
Another primary yield source for stablecoins is through crypto derivatives based on liquid staking tokens (LSTs) and liquid restaking tokens (LRTs). Such tokens represent an underlying crypto asset, such as Ether (ETH) or Bitcoin (BTC). When the original underlying asset earns interest on-chain (for example, via staking), the yield accrues to its liquid representation.
In turn, yield accumulated by the LST or LRT is then shared with holders of the yield-bearing stablecoin that tracks these liquid tokens.
This is how it typically works: let's say a protocol issues an LST in the form of Lido Staked Ether (stETH) to anyone staking Ether. Additionally, there's a yield-bearing stablecoin based on that LST. Users with ETH funds deposit into the protocol, and are issued stETH, the LST that accrues their staking rewards. As staking rewards are added to stETH, a portion is also shared with your stablecoin. In essence, you earn yields by holding the stablecoin as a derivative asset without needing to stake crypto yourself.
TradFi and RWAs
Some yield-bearing stablecoins are tokenized, on-chain representations of RWAs and traditional financial instruments. For instance, a stablecoin may represent your investment in a tokenized fund that generates yield by investing in Treasury bills, corporate bonds, equities and other traditional assets. As the fund earns yield through these financial instruments, it’s shared with stablecoin holders.
Benefits of yield-bearing stablecoins
Passive income with lower volatility
One key benefit of yield-bearing stablecoins is the ability to earn passive income while enjoying the stability provided by these assets. The crypto market is well known for its highly volatile nature, and stablecoins generally offer unmatched stability as compared to any other type of cryptocurrency. Thanks to their peg to the US dollar or other established fiat currencies, your funds are well-protected from losing their real-world value — even if Bitcoin and other cryptos decline markedly — giving you peace of mind combined with steady, even if modest, income from these coins.
Borderless access to low-risk returns
Returns from yield-bearing stablecoins are typically low risk. This is particularly the case for stablecoins representing tokenized TradFi instruments. At the same time, you can enjoy these low-risk returns regardless of your location because these assets reside on-chain.
Most traditional low-risk investments in the US (e.g., Treasury bills and other cash equivalents) are highly regulated by the country’s securities laws. Foreigners residing in the US may need an international brokerage account, and to meet additional qualification requirements in order to invest in these assets. In contrast, purchasing, holding and trading yield-bearing stablecoins is open to anyone with a crypto wallet. These stablecoins provide ready access to steady, low-risk returns for both US residents and foreigners.
Reduced opportunity cost
Investing in traditional stablecoins preserves the nominal value of your funds at the time of investment, but generates no yield. Therefore, these assets lose their real value over time due to inflation. In contrast, yield-bearing stablecoins provide additional income that grows on top of the principal. As such, investing in these stablecoins provides a better deal than parking your funds in their traditional counterparts.
In general, any investment in low-risk and low-return assets carries opportunity cost. By holding your funds in these kinds of investments, you forego the earnings potential offered by higher-risk asset types. However, this opportunity cost is lower with yield-bearing stablecoins as compared to traditional ones for the reason above: the former accrue yield on top of the principal, while the latter do not.
Composability in DeFi
Like most other cryptocurrencies, many yield-bearing stablecoins may be used in various DeFi protocols for further yield. This may vary by each specific coin, as some issuers impose certain limitations on such composability.
The utilization of yield-bearing stablecoins in DeFi protocols is something that the traditional assets they represent (such as cash and cash equivalents) lack. You can’t simply lock Treasury bills in a growth-focused DeFi lending protocol, but you may well be able to do so using a yield-bearing stablecoin that acts as a tokenized representation of the bills.
Simplified user experience (UX)
Earning interest from yield-bearing stablecoins isn’t rocket science — even for crypto beginners. Many protocols automatically distribute yield in the form of additional tokens of the same kind, a process known as rebasing. Other issuers may pay yields in some other token, specifically used as a reward cryptocurrency.
Regardless of the method used, the stablecoin holders usually receive their yields directly into their wallets without having to worry about performing any additional crypto operations. In most cases, you earn yield from these assets simply by holding on to them, ensuring a smooth and simplified UX.
Risks of yield-bearing stablecoins
Inconsistent yield
Yields earned via yield-bearing stablecoins aren’t fixed, and may fluctuate. Market volatility may affect the returns these assets generate. Some yield-bearing stablecoins, especially those that generate yields through DeFi protocols, may be affected by the typically high volatility of the crypto world. In addition, incomes earned by DeFi protocols and shared with holders of the stablecoins can vary widely, depending upon transaction activity within a given protocol.
Even stablecoins tied to low-risk RWAs such as government bonds are affected by interest rates set by the Federal Reserve. These rates may change based on factors like underlying inflation in the economy, unemployment figures, business spending levels, credit market conditions and geopolitical risks.
Devaluation of collateral
Sudden and drastic devaluation of collateral is also a risk for yield-bearing stablecoins. Although they’re pegged to established fiat currencies, the reserves backing them may consist of much more volatile assets, such as BTC or ETH. Any significant declines in the value of these collateral assets can potentially lead to instability and depegging.
The risk of collateral devaluation isn't limited to stablecoins backed by cryptocurrencies, and such risk is also present for RWA-backed, yield-bearing coins. For instance, if a stablecoin is backed by tokenized real estate investment trusts (REITs) and a severe downturn occurs in the property market, it could act as a catalyst for the stablecoin’s collateral devaluation.
Liquidity risks
Sufficient liquidity may also be an issue for yield-bearing stablecoins. Limited trading volumes and inflexible redemption mechanisms are typical characteristics of some of these assets. These factors may exacerbate liquidity crunches during sudden surges in trading activity for them. For instance, if many investors try to redeem their stablecoins at the same time, the issuer may struggle to accommodate the requests. Any delays in redemption beyond normally agreed-upon times may lead to a panic among investors, who could rush to redeem their funds, causing a liquidity crisis for the issuer.
Smart contract and security risks
Since yield-bearing stablecoins are based on blockchains, there are always technological risks. The operational mechanism of these stablecoins is typically managed via on-chain smart contracts, which could be compromised during hacking attempts.
Network outages unrelated to hacking exploits also occur on blockchains, which can affect a stablecoin’s flow of operations. Although the largest smart contract chain in the industry, Ethereum, is well known to have never experienced a major outage, several other popular chains, including Solana (SOL), Polygon (POL) and Arbitrum (ARB), have had at least one significant network disruption event in the past few years.
Regulatory risks
Regulatory risks also exist for yield-bearing stablecoins. As of April 2025, the US still doesn’t have a comprehensive, federal-level law regulating stablecoin assets. In early 2025, the GENIUS and STABLE Acts were introduced to the Senate and the House of Representatives, respectively. These acts specifically deal with stablecoin cryptocurrencies. Both bills are still being considered by US lawmakers.
If and when these bills are passed into law, some yield-bearing stablecoins — depending upon their operational mechanisms, collateral types, issuer standing and other key factors — might find themselves struggling to satisfy new regulatory requirements.
Top yield-bearing stablecoins for 2025
USDS
USDS is a stablecoin of Sky Protocol (SKY), formerly known as MakerDAO (MKR). It represents a rebranded version of the protocol’s original Dai (DAI) stablecoin. Users can mint USDS via Sky Protocol by depositing collateral in various eligible assets, such as ETH, USDC and certain tokenized RWAs.
After minting USDS, you can use it throughout the DeFi ecosystem, as with other major stablecoins. USDS maintains an algorithmic peg to the US dollar, with overcollateralized reserves backing the coin.
You can also generate yield from Sky Protocol by depositing your USDS into a savings smart contract. Upon depositing your funds, you’re issued the sUSDS coin (SUSDS), which represents the yield-accruing version of USDS.
Ethena USDe (USDE)
The Ethena (ENA) DeFi protocol offers a synthetic stablecoin, USDe, whose value is maintained via advanced trading strategies. Pegged to the US dollar, USDe is minted by depositing BTC, ETH, stETH or USDT. USDe’s peg and its collateral stability are ensured via the use of delta hedging trading strategies, which attempt to balance the risks for the traded asset by taking directionally opposite positions through related financial instruments such as options and futures contracts. For instance, to hedge against the risk of the decline in ETH’s collateral value, Ethena may purchase an Ether-based short futures contract.
As the delta-hedging strategies (hopefully) deliver positive returns (e.g., via positive funding rates for the futures held by Ethena), your USDe investment accumulates yield. You may also earn yields with USDe via the Ethena protocol by staking. Ethena uses your funds to stake on the underlying Ethereum blockchain, delivering regular staking rewards distributed via sUSDe, the staked version of USDe.
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BlackRock USD Institutional Digital Liquidity Fund (BUIDL)
The BlackRock USD Institutional Digital Liquidity Fund (BUIDL) provides a stablecoin that represents ownership in a tokenized money market fund managed by BlackRock, the world's largest asset management firm. This fund invests in various cash and cash-equivalent instruments, such as Treasury bills and repurchase agreements.
As the fund's investments earn interest, this interest is distributed to the holders of the BUIDL stablecoin. BUIDL is an Ethereum-based cryptocurrency, but under the fund's rules, it's not tradable on the crypto market. As such — unlike most other stablecoins — BUIDL's rate will theoretically stay fixed at exactly $1, although the issuer doesn’t guarantee this rate.
The fund's yield is calculated daily, and is distributed to BUIDL holders once a month.
Ondo US Dollar Yield (USDY)
The Ondo US Dollar Yield (USDY) token is another stablecoin that generates yield via traditional RWA instruments. Offered by Ondo Finance (ONDO), which specializes in institutional-grade DeFi solutions, USDY is backed by US Treasury bills and bank demand deposits.
Before you can mint USDY via the protocol, you’ll need to go through a formal onboarding process, during which you’ll be asked to submit your identity documents and the crypto wallet address to receive the stablecoin, as well as any necessary tax documents. If all documentation is in order, you can then acquire USDY by depositing either US dollars (for amounts of $100,000 or more) or a minimum of 500 USDC.
USDY is somewhat different from the other stablecoins we’ve mentioned above, since yields generated for token holders aren’t distributed separately as new USDY tokens using the rebasing system. Instead, the yields are added to each unit of USDY held. Due to this mechanism, the price of the USDY stablecoin is normally higher than $1 because it includes the accumulated yield in addition to the principal.
Ondo also offers a rebasing variation of the USDY stablecoin, rUSDY, for which yields are sent to holders as new tokens of the same kind by increasing the supply of the cryptocurrency.
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Usual USD (USD0)
Usual USD (USD0) is a yield-bearing stablecoin offered by Usual (USUAL). USD0 is pegged to the greenback, and is fully backed by RWAs, such as Treasury bills. You can mint USD0 by providing collateral in eligible RWA assets. Alternatively, you can also obtain the stablecoin by depositing USDC collateral.
By staking USD0, you can receive the token’s liquid version, USD0++. As an LST, USD0++ is a composable asset that’s used throughout the DeFi ecosystem for yields. These yields are distributed in USUAL tokens, the native governance cryptocurrency of the protocol.
One important note is that the mandatory locking period for USD0 to benefit from USD0++ yields is four years. As such, it may suit crypto users with a long-term approach to investing.
Closing thoughts
Yield-bearing stablecoins have breathed new life into the stablecoin market. For years, stablecoins lacked yield accumulation, making these assets less than optimal for preserving the real value of your investment — especially during times of high inflation. Now, with the explosive growth of the niche, a crypto investor has many choices at their fingertips — native DeFi yield coins, crypto derivatives–based coins, and assets backed by traditional finance instruments.
These yield-bearing stablecoins offer numerous benefits to investors — a passive income source with low volatility, borderless access, lower opportunity costs than for traditional stablecoins, major composability in DeFi and a simplified UX. With all these advantages on offer, it’s no surprise that the category of yield-bearing stablecoin cryptocurrencies is growing by leaps and bounds. As a result, 2025 may well become the first year this previously modest segment of the stablecoin market becomes its driving force.
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